The limiting factor that stunts the growth of a company is the lack of capital. To solve this problem, companies look for sources to finance their business. The two main ways this happens are through debt or equity.
Financing through debt is the process in which the company borrows money from an external party. One of the main disadvantages of this method is the lack of safety due to the liabilities that come with a loan.
Therefore, companies often opt for the second method: financing through equity. This involves selling part ownership of the company in return for investing capital. To do this, the company will need to be publicly traded. The company turns from private to the public after its first initial public offering (IPO).
Definition
Initial public offering (IPO) is the first time a private company lists its shares on one or more stock exchanges, making them available for purchase by the general public and contributing to its shareholder’s equity.
Advantages of an IPO
An IPO offers a relatively risk-free way for the company to raise additional capital to continue to expand operations. Furthermore, IPO companies can have a lower cost of capital for both equity and debt.
In terms of internal growth, companies will benefit from more exposure. They will gain consumers through reputation on the stock market and higher quality employees who want to work for a prestigious company. Moreover, they can retain and motivate employees better with the company’s stock handouts.
Disadvantages of an IPO
Becoming a publicly-traded company comes with a substantial increase in complexity in the accounting department. More time, effort, and attention will be required for managing financial statements, which have been closely regulated since accounting scandals in the early 2000s.
For the initial owners, an IPO will dilute the power they have over their own company. Once more than 50% of the company’s stocks are owned by the general public, they effectively lose control over the company. The company can also be pulled apart with conflict from large shareholders who do not share the same vision for growth.
Conclusion
An initial public offering (IPO) is a company’s debut on the stock market. Most IPOs happen because a company wants to raise additional capital to increase growth safely. However, IPOs can increase complexity in managing the accounting aspects of the company.
